The value of your building is largely determined by the value of your
present and future leases. For the manager, the ability to evaluate
present leases and project future ones is vital for anticipating cash
flow and estimating value. If you add lease-by-lease analysis software
to your system, you will be able to accomplish these types of analyses.

Lease-by-lease software programs enable the manager to:

* Evaluate potential leases based on net present value of the
future results.

* Evaluate potential leases based on a change in valuation of the
property itself.

* Budget and project expense reimbursements and escalations on a
lease-by-lease basis.

* Evaluate the trade-offs and real effects of concessions and
different lease-terms strategies.

If you are familiar with discounted cash flow (DCF) analysis, the
current generation of lease-by-lease (LXL) programs will be impressive
to you. If you are not comfortable with DCF analysis, they can be
intimidating.

Most of the programs are much superior to spreadsheet models. Doing
LXL analysis with a spreadsheet requires simplifying to a much greater
degree than is common in lease-by-lease. If you need a spreadsheet, you
can generally export the data from your LXL program.

The benefits of LXL programs include better management for your
properties (whether owned or fee-managed), more and better service for
your clients, and a better chance at enhanced fees for extra services.

The basics

To use lease-by-lease programs, managers must input current lease
data, which can be found in the property management software system.
Details must be added concerning projected concessions, escalations,
percentage rent, and other factors affecting future cash flow.

Property-level details such as expenses, non-tenant revenue sources,
vacancy, capital expenditures, and future property sales scenarios must
also be incorporated.

You must make projections on what you think will occur in the
future--lease expirations, anticipated new rental rates, tenant
turnover, and leasing commission cost.

Once all the data is input, the system will calculate results and
print many kinds of reports including cash flow projections, future
sales results, and ROI outcomes.

Of course, as with any analysis program, the validity of the analysis
is only as good as its assumptions. Start with a benchmark scenario that
estimates your best, unbiased opinion of future performance. Change an
input (for example, a projected rent series), recalculate the model, and
check the results.

By altering and comparing model variables, you will be able to arrive
at the best management strategy. Also keep in mind that you will not be
able to accurately predict many of the inputs into the model--for
example, the growth of property expenses.

Using LXL software

Evaluating different concessions strategies is a good way to develop
familiarity and comfort with LXL software in property management. For
example, develop your benchmark scenario based on current concessions
and contracts and on your current concession strategy. Then compare
alternative strategies and terms. See how well you understand the
value/cost of your current strategy. Is it as good as you hoped?

Reimbursement strategies, rollover strategies, and specific
individual leases can all be analyzed using LXL programs. Property
managers can evaluate lease proposals in terms of, for example, how the
benchmark property value is affected.

The manager may determine the relative merits of renting in the near
term at low rates versus waiting for higher rates later. Some of the LXL
programs also provide for analysis of individual leases based on net
present value and net-effective-level-rent-equivalent.

Tenant representatives use lease comparison software programs to
compare lease terms and structures for tenants. Unlike LXL software,
which is designed to analyze an entire property, lease comparison
software is intended for the comparison of individual leases. But naive
property managers who do not take the time to use LXL or lease
comparison software are negotiating at a disadvantage.

LXL software is also a valuable addition in developing both expense
and revenue budgets. It is superior in important ways to property
management software for budgeting tasks, especially for tenant-by-tenant
reimbursements and escalations. Most of the good LXL programs provide
true month-to-month projections (in contrast to the year divided by 12).
Details are based on actual contract terms and can be projected by
tenant.

The best current option for comparing actuals to budgets is to create
a comparison spreadsheet, export the actuals data to it from the
property management program, and export the projects/budget data to it
from the LXL program.

Linking LXL and PM software

One of the most important issues for a property manager considering
LXL software is the presence of an interface between the property
management program and the LXL program.

An interface allows for the transfer of lease data from the property
management program to the LXL software. The transfer of this data can
save several hours of keyboarding, proofing, and editing to get the data
into the LXL program.

This type of interfacing has been slowly developing over the past few
years. Most of the major LXL programs provide for an interface with a
few of the leading property management programs whose publishers have
made the effort to cooperate.

That is the good news. The bad news is that the state of the art in
interfacing is very primitive and awkward.

Ensuring interface access

To be certain that an interface can be achieved with the LXL program
you select, ask your property management software vendors for written
copies of either the data dictionary/file specification documentation
for your system or the "mapping" documentation showing the
specifications of an interface to a specific LXL program.

The data dictionary/file specification lists each relevant data
item/field along with technical specifications such as the field number,
type, length, name, and so forth. This information will enable your LXL
vendor to develop an interface to your property management software.

The mapping documentation shows which specific data items in the PM
program get transferred to which specific data items in the LXL program.
For example, that "tenant name" data goes to the
"tenant" item is obvious. But not all data correspondences are
so easy. Not only are data names/field titles different, but in some
cases, a combination of data items from the property management program
should be transferred to a single data item in the LXL program.

The mapping documentation also should show the file/field
specification data for each program. And it should have two lists--one
sorted by the field order in the property management program and the
other sorted by the LXL field order.

Alternatively, or concurrently, ask your LXL vendor for file
specification or mapping documentation. It is not uncommon for these
interfaces to be undocumented. In that case, you will need to develop
your own map of which items are connected.

One LXL vendor offers a "Standard Interchange File for Real
Estate," which shows how to set up data to import into that one LXL
program. It is not very useful for importing data from a property
management program; most of the data import specifications are relevant
to a special text processor-type file.

Updating LXL data

While an interface is valuable for initial data entry for a property,
especially a large one with complex current leases, LXL programs require
that a great amount of data be keyed into the program directly. For
example, all of the rollover data must be entered manually. Depending on
the LXL program, some of that information does not need to be entered on
a lease-by-lease basis.

Updating the LXL system from the property management program is
generally primitive. For example, the act of transferring updated data
six months later can wipe out much of the keyboarded data entered for
the previous analysis.

Overall, the amount of data which can be transferred from the
property management system may be small in relation to the data lost by
the update transfer. So, updating from the keyboard may be the better
choice.

One LXL publisher is working with at least one property management
system publisher to provide an interface of month-by-month budget data
back from the LXL program to the property management program. This has
excellent potential for property managers.

The future of property management software in LXL

Thus far property management software publishers have not moved to
develop projections/DCF/LXL programs. A few of the strong vendors have
previously considered it and decided against it. And one noticeable
failure a few years ago was viewed as a lesson for others.

On the other hand, the growing demand for asset management
functionality improvements and the associated higher demands on property
managers are creating interest in better solutions. The ability to
integrate, or at least interface, LXL programs with property management
systems is becoming ever more important.

If that pressure does not increase, we may limp along like this for a
long time. If it does, something will change dramatically.

Through no one's fault, the fact is that the property management
systems and LXL systems are fundamentally incompatible. They are like
two different species, not variations of the same animal. Each of the
two program types has been developed from a sound foundation. But now
each has reached the limits of that foundation. The new foundations must
be "databases."

Property management systems have been fundamentally accounting
systems based on "procedural" concepts, not on database
concepts. The use of databases as underlying foundations for generic
accounting systems and later for property management systems is
relatively new.

Thus, database technology is largely absent from the current
interfaces available between LXL and property management programs. All
the interfaces rely on primitive ASCII technology.

The "database" issue is a touchy one for more property
management software publishers than you would expect. Those that have
good, solid database cores for their programs will prove it to you.
Those with programs that are extensively retrofitted to look like and
act like databases on the surface can't prove it, but will claim
it.

If a program is written in a "database language," you can
assume it is a database. If it is written in a "programming
language," it may or may not be a database. If it is a database and
it is written in a modern programming language such as C or C++, it may
be superior to a program written in a database language.

A property management program with a database core is much more than
an accounting program. Even though this is a technical issue, it is
important to the end user.

The future of LXL software

LXL programs are fundamentally pocket calculators with incredibly
more power. The most powerful ones are awesome in terms of their number
crunching abilities. And as calculating devices they are not deficient.

The problem shows up when we push them to their limits. They are so
powerful and can accommodate so much detailed data that a problem now is
how to get that much data into them in an efficient manner and how to
access the data you really want. This is one of those frustrating problems of success.

To achieve their full potentials, the LXL programs need to strengthen
their structures in several ways.

* Database for tenant information. The tenant data needed for LXL
program input is stored in property management programs. This data
should be stored in database files which form the core of property
management programs. To transfer data from property management programs
to LXL programs, the LXL programs should be built on database cores.
There are many additional benefits to that type of foundation.

* Chart of accounts. LXL programs are generally superior to
property management programs in budget development and month-by-month
projections. This is especially so for the revenue side, including
reimbursements. In addition, revision of budgets is much easier in LXL
programs than in PM programs. The primary deficiency in LXL programs is
how to compare budgets/projections to actuals.

The key to accessing actuals data in property management programs is
through the chart of accounts. LXL programs should be built on
chart-of-accounts concepts, including tenant ledger level, which are
compatible with PM systems.

With good database foundations under each program, other issues of
importance for budgeting, projecting, controlling, and comparing could
be handled. The program could provide for comparisons of actuals to
budgets/projections at the tenant level and at the
subtotalling/summary/account/aggregation levels.

* Projection of future accounting results. LXL programs are
currently conceived as DCF systems. A conception that makes more sense
for the future is to see them as programs that project future accounting
results. That fits very well with the property management system concept
and with asset management needs.

By providing projections for very detailed accounting items in
addition to the summary/bottom-line outcomes such as NOI, LXL analysis
will open new possibilities to the property manager.

Conclusion

The available LXL programs have significant differences in their
power, extensiveness, and sophistication. Each has some unique features.
A couple of the programs are relatively new. And some new versions of
older programs are on the way. Overall, the rate of change in the
programs is increasing.

The LXL programs finally have earned their long-deserved, but
long-in-coming, recognition as being far superior to spreadsheets. As a
property manager you can very probably benefit from this technology.
Give it a chance.

Lease What?

Confusion among terms for software program types is growing. The de
facto standard types include the following:

Lease-by-lease

These programs are used by acquisition analysts, appraisers, and
asset managers for evaluating whole properties, not individual leases.
The property can be analyzed on a tenant-by-tenant, lease-by-lease basis
instead by broad categories as is used for apartment properties.

Lease comparison

These programs are designed primarily for the use of tenants or
commercial brokers. Managers or owners can, of course, use them, but
rarely do so. These programs are designed primarily to compare different
lease alternatives. They include columnar comparisons and net present
value/cost of different leases.

Lease administration

These programs are designed for the lessee's administrative
requirements of leased space. They are generally databases with a
tickler system as a central feature. Some lease administration programs
include non-DCF, lease-analysis features.

Lease analysis

This term usually refers to DCF analysis of individual leases instead
of properties. But you also hear it used to refer to lease-by-lease
software. Some, not all, lease-by-lease programs also can perform lease
analysis for individual leases.

More than 60 off-the-shelf, or "canned," real estate
investment analysis programs are currently available. About 80 others
have appeared and disappeared over the last ten years. The primary
distinction is between programs for existing properties (in four major
categories) and programs for development analysis. A few programs
encompass both types.

Existing-property programs

* Lease-by-lease. This category is the subject of this article. The
programs are used for analyzing present and future cash flows of entire
commercial properties on a lease-by-lease, month-by-month basis.

* DCF (discounted cash flow). These programs, used primarily for
apartment properties, are not specifically designed for lease-by-lease
analysis. Some of the vendors can demonstrate how to approximate
lease-by-lease analysis for small properties.

* Limited function. These DCF-type programs are designed for and
used by small investors as contrasted to real estate professionals. They
are simplistic and generally low priced.

* Specialty. A few programs are more narrowly focused on specific
needs or property types.

Development-analysis programs

These programs are available in several varieties. Some have
"lease-up" analysis capabilities without real LXL
capabilities. A few programs also have real LXL capabilities and can be
used for existing-property analysis.

Scenario Comparison Terms

Market-value scenario: The data set which produces your best
unbiased, objective estimate of the market value of the property.
Concerns about the market value being too high or too low can easily
lead to manipulation of inputs to produce a desired value which
masquerades as the estimated value.

Benchmark scenario: A data set which you use to compare all other
scenarios. You can use the market value as benchmark, but there are
advantages to using a different case.

The differences between market value and benchmark may be subtle, but
using a benchmark set of values for performance measurement removes the
hidden agenda of manipulating the level of the value estimate. The
"significance" of the market value can produce strange
behavioral results and unfortunate management decisions. The
"benchmark" value is clearly used for analysis.

Absolute value: A specific dollar amount, which could be the market
value estimate or the benchmark value (the value result for the
benchmark scenario).

Relative value: A dollar amount associated with a percentage
relationship or a relation-word such as more, greater, or less. For
example, "Scenario XT produces a result which is $10,000 more than
the benchmark scenario."

Case: This term can be used interchangeably with
"scenario." A "case" may refer to one or a few
variables while a "scenario" refers to the broad set of
variables.

Base case: This is similar to a benchmark for a variable; it is the
hypothetical case to which all others are compared.

Index: Comparisons of different projected outcomes may be made by
converting the benchmark/base result to an index of 100 and indexing
other results. Merely divide the benchmark result by itself (and
multiply by 100), then divide all other results by it. For example,
"The case LAT index is 110."

"What-if" analysis: All programs and models allow for this
analysis. Changing one or more inputs and recalculating the results
shows you "what happens if ..."

Sensitivity analysis: Some LXL programs will provide a set of results
in one calculation; what-if analysis produces only the basic results.

If you are familiar with spreadsheets, the "data table"
function is a sensitivity analysis, while a simple recalculation of the
model is a what-if analysis.

Criterion variable: The particular outcome result you are concerned
with, for example, the market or benchmark value, or the IRR, cash-flow
level, cash-on-cash yield, total commissions, and so on. Any calculated
number in the model can serve as a criterion variable.

Many input variables which are based on judgment can also serve as
criterion variables. For example, your judgment of the rollover vacancy
time can be a criterion variable in comparing different
management/leasing strategies. The rollover time can, in the same
analysis, be varied and evaluated by other criterion variables such as
benchmark value.

Michael J. Hanrahan is president of Real Estate Software Advisors and
the Real Estate Software Test Lab in San Francisco. He has been a real
estate software reviewer and consultant for JPM since 1987 and has
independently evaluated more than 100 property management and 80 real
estate investment analysis software programs.